Barclays 2006 Annual Report Download - page 93

Barclays PLC
Annual Report 2006 89
Operating review
1
Risk management
Capital and liquidity risk management
Liquidity management within the Group has several strands:
•Day to day funding, managed by monitoring expected cash flows to
ensure that requirements can be met. This includes replenishment
of funds as they mature or are borrowed by customers. The Group
maintains an active presence in global money markets to enable that
to happen.
•Maintain a portfolio of highly marketable assets that can easily
be liquidated as protection against any unforeseen interruption
to cash flow.
•Monitor, manage and control intraday liquidity in real time is
recognised by the Group as a mission critical process: any failure
to meet specific intraday commitments would have significant
consequences.
•Stress testing is undertaken to assess and plan for the impact of
various scenarios which may put the Group’s liquidity at risk.
The ability to raise funds is in part dependent on maintaining the Bank’s
credit rating. The funding impact of a credit downgrade is regularly
estimated. Whilst the impact of a single downgrade may affect the price
at which funding is available, the effect on liquidity is not considered
material in Group terms.
Liquidity risk measurement
Monitoring and reporting take the form of cash flow measurement and
projections for the next day, week and month as these are key periods
for liquidity management. This is based on principles agreed by the FSA.
In addition to cash flow management, Treasury also monitors
unmatched medium-term assets and the level and type of undrawn
lending commitments, the usage of overdraft facilities and the impact of
contingent liabilities such as standby letters of credit and guarantees.
Treasury develops and implements stress tests on the Group’s projected
cash flows. The output informs the Group’s contingency funding plan.
This is maintained by Treasury and is aligned with the Group and
country business resumption plans to encompass decision-making
authorities, internal and external communication and, in the event of
a systems failure, the restoration of liquidity management and
payment systems.
Sources of liquidity are regularly reviewed to maintain a wide
diversification by currency, geography, provider, product and term.
Whilst the past year saw relatively stable markets, with no significant
consequences for the Group’s liquidity, significant market events over
recent years including corporate scandals contributed to a short-term
flight to quality in financial markets from which Barclays benefited.
An important source of structural liquidity is provided by our core retail
deposits in the UK, Europe and Africa, mainly current accounts and
savings accounts. Although current accounts are repayable on demand
and savings accounts at short notice, the Group’s broad base of
customers – numerically and by depositor type – helps to protect
against unexpected fluctuations. Such accounts form a stable funding
base for the Group’s operations and liquidity needs.
To avoid reliance on a particular group of customers or market sectors,
the distribution of sources and the maturity profile of deposits are
also carefully managed. Important factors in assuring liquidity are
competitive rates and the maintenance of depositors’ confidence.
Such confidence is based on a number of factors including the Group’s
reputation, the strength of earnings and the Group’s financial position.
For further details see contractual cash obligations and commercial
commitments of the Group on page 81.
Capital and liquidity risk management
The Board Risk Committee has approved minimum control
requirements for capital and liquidity risk management.
The Treasurer has established risk control frameworks and a policy and
assurance structure to ensure that capital and liquidity risks are managed
in accordance with the requirements of the Board. Policies are set by the
Treasury Committee which is chaired by the Group Finance Director.
Capital risk management
The Group manages its capital resources to meet regulatory capital
requirements. The FSA requires the Group to hold sufficient capital
resources to meet minimum regulatory capital requirements. In
addition, the Group manages its capital resources to maintain financial
holding company status under the rules of the US Federal Reserve Bank
and also to ensure Group entities, that are subject to local capital
adequacy regulation in individual countries, meet their minimum
capital requirements.
Minimum requirements under FSA rules are expressed as the ratio
of capital resources to risk weighted assets (Risk Asset Ratio). Risk
weighted assets are a function of risk weights applied to the Group’s
assets using calculations developed by the Basel Committee for Banking
Supervision. In anticipation of the Group’s implementation of the new
Basel II standards on 1st January 2008, the Group will also manage its
capital resources in accordance with the Basel II advanced approaches
during 2007.
In 2006, the Group continued to manage its capital resources, including
accessing the capital markets, in order to exceed the minimum capital
requirements of its regulators. As at December 2006, the Barclays
Group Risk Asset Ratio was 11.7% and the Tier 1 Ratio was 7.7%.
The graph shows the Group’s regulatory capital resources broken down
by tier. Further information on the Group’s capital resources is provided
in the Financial Review on pages 58 and 60.
Liquidity risk management
This is the risk that the Group is unable to meet its obligations when
they fall due and to replace funds when they are withdrawn, with
consequent failure to repay depositors and fulfil commitments to
lend. The risk that it will be unable to do so is inherent in all banking
operations and can be impacted by a range of institution specific and
market-wide events including, but not limited to, credit events, merger
and acquisition activity, systemic shocks and natural disasters.
Tier 1
Tiers 2 and 3(a)
05 06
30,502
34,711
0
Regulatory capital resources by tier £m
35,000
30,000
25,000
15,000
20,000
5,000
10,000
Note
(a) Less supervisory deductions.